lecture1-Valuation_and_Shareholder_Value_v2

lecture1-Valuation_and_Shareholder_Value_v2 - Valuation and...

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Valuation and Shareholder Value September 5, 2005
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Corporate Finance 2 The Shareholder Value Approach  Management         Value              Valuation                Corporate         Decisions              Drivers            Components          Objective       Value Growth Duration •  Sales Growth •  Op. Prof. Margin •  Income tax rate Discount Rate CFFO •  Working Capital •  Fixed Capital •  Cost of Capital •  Debt Capacity Financing Investment Operating Debt Creating Shareholder  Value Shareholder Returns:    Dividends   Capital Gains
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Corporate Finance 3 Equity = Discounted dividends Why is the stock price (value) the discounted sum of the future cash flows (dividends)? ... ) 1 ( ) ( 1 ) ( 2 2 1 ?? 0 + + + + = r d E r d E P
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Corporate Finance 4 Derivation The expected return on the stock is, by definition: Which, rearranged, gives: ) ( 1 ) ( 1 ) ( 1 1 0 r E P r E d E P + + + = 0 0 1 1 ) ( ) ( P P P d E r E - + = ) ( 1 ) ( 1 1 0 r E P d E P + + = And:
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Corporate Finance 5 ... )) ( 1 ( ) ( )) ( 1 ( ) ( ) ( 1 ) ( ... )) ( 1 ( )) ( 1 ( ) ( ) ( 1 ) ( ) ( 1 ) ( 1 ) ( 3 3 2 2 1 0 2 2 2 2 1 0 2 2 1 + + + + + + = + + + + + = + + + = r E d E r E d E r E d E P r E P r E d E r E d E P r E P r E d E P Derivation The same applies to P 1 , which can then be substitutied in P 0 , and so on recursively
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Corporate Finance 6 Dividends vs Cash Flows ... )) ( 1 ( ) ( )) ( 1 ( ) ( ) ( 1 ) ( 3 3 2 2 1 0 + + + + + + = r E d E r E d E r E d E P ... )) ( 1 ( ) ( )) ( 1 ( ) ( ) ( 1 ) ( 3 3 2 2 1 0 + + + + + + = r E FCF E r E FCF E r E FCF E P Is equivalent to (remember this proposition?):
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Corporate Finance 7 Free Cash Flow Value = sum of discounted expected free cash flows Definition: FCF t is the net cash flow received by all security holders of the firm together Cash flow to equity holders + cash flow to debt holders Or: FCF is the net cash flow generated by the firm’s invested capital
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Corporate Finance 8 Analysis of Free Cash Flows Free Cash Flow = Cash Inflow – cash outflow Cash Inflow = Sales x Operating Margin Cash Outflow = Fixed Assets + Working Capital + Taxes Cash Flow to Equity = FCF – Payments to debt-holders
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Corporate Finance 9 A view from the balance sheet Assets Liabilities FA Equity STA Debt Cash STL Assets Liabilities FA Equity WC = STA - STL Debt Cash Total Liabilities Total Assets Invested Capital
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Corporate Finance 10 Example – Sbux, balance sheet BALANCE SHEET 1999 2000 2001 2002 2003 2004 Cash 66 71 113 100 201 299 Marketable securities 51 61 107 227 149 354 Inventories 181 202 221 263 343 423 Accounts receivable 48 76 90 98 114 140 Other current assets 40 50 62 85 117 153 Total current assets 386 460 593 773 924 1.369 Net fixed assets 760 930 1.137 1.265 1.383 1.469 LT Investments - 3 63 102 136 135 Other assets 106 96 54 77 286 356 Total assets 1.252 1.489 1.847 2.217 2.729 3.329
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lecture1-Valuation_and_Shareholder_Value_v2 - Valuation and...

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